While revellers are driving around the streets honking their horns in delight at the result of the divorce referendum, I thought I would choose a more serious for my comments and have chosen to write on the travails of the euro.
While revellers are driving around the streets honking their horns in delight at the result of the divorce referendum, I thought I would choose a more serious for my comments and have chosen to write on the travails of the euro.
This issue has again hit the headlines but it has drawn little if any comment from our local journalists, as the focus has been the divorce issue. Really and truly, one can console oneself that there is very little a tiny EU member can do to affect the course of the financial troubles hitting the euro at this particular juncture, so why worry when such a life-threatening subject such as the introduction of divorce was in the balance at yesterday’s referendum. However, it is very much in our interests to follow the financial news and consider the consequences to our open economy if the euro continues in its unhappy trajectory, starting with the latest plunge of the euro against the dollar which has fallen 0.7 per cent to $1.4216. Oil’s decline mirrored this fall, with the price of crude going down by more than $2 a barrel .Again, while this is welcome news for an island that imports and relies 100 per cent on fossil fuel for its electricity generation there has, strangely, been no announcement of fuel cuts by Enemalta.
Yes, it is a welcome sign that the volatility of the currency is resulting in a correction in oil prices, but uncertainty is not healthy. Notice how the euro fell after the German Bundesbank issued a statement that led the market to anticipate that the European Central Bank will increase interest rates to calm inflation. The euro is in the sick bay and reflects the actions of the profligate sons and daughters of ancient Sparta, who are the cause of the higher maturing yields on their bonds. The Greeks are no longer wearing luxuriant foliage or garlands in their hair but instead have been protesting in the streets against sustained austerity measures.
The rate credit rating agency Fitch has, in turn, cut Greece’s long-term debt rating to B+, four notches below investment grade. Greece has to pay through the nose to repay the €300 billion in accumulated national debt. A cool 16.6 per cent on 10-year Greek bonds is no walk in the Pantheon with a refreshing drink of ouzo. What happens in Greece is being carefully monitored by the other two patients in the sick bay – Portugal and Ireland. Evil tongues – mostly from British eurosceptics – are saying that Spain will be following Portugal, Ireland and Greece in needing financial rescue as the eurozone’s debt crisis spreads. Spain’s socialist government has just paid a heavy price at the polls, while the beleaguered Greek prime minister is gracefully nurturing the presence of international debt inspectors taking a sceptical look at it books. Can it meet the terms of its €110 billion bailout package? If it hits a bug, then the medicine will be bitter, with more austerity ordered from Germany and the International Monetary Fund.
It is a crucial point in this judgment which decides if the next €12 billion tranche of rescue loans is approved. This is precariously poised to happen next month. If the Greeks fail to pass the test, will a second bailout be inevitable? The answer lies mostly in the hands of the German chancellor. She controls the purse strings of what is by far the strongest economy in Europe and if anybody steps up the contributions to the fatigued Greeks to bail out Athens, it can only be Germany. It is a double-edged sword. If Greece defaults, it will bring down the façade of billions of worthless paper or bonds held mostly by German institutions. Ironically, riots and tear gas fired against protestors in the streets of Athens will not change the mathematics or the fate of the Greek economy. It is only the Germans who can afford to bail them out, as the other EU countries may not be strong enough to save it. But save it they must, because the price of a default of the euro will be horrendously high. It is not an option for Greece to leave the euro and return to the drachma, which would fall in value and make its exports competitive – giving its beleaguered economy a golden opportunity for growth which currently it lacks. While Athens burns, it is interesting to watch the French displaying typical sang-froid – calling on the Germans to recognise their duty and pump billions into Greece – while not admitting that the euro faces the very real prospect of collapse. Still, it is no use Malta ignoring these negative trends in the euro and continuing to bury its head in the sand as if there is nothing to worry about.
This is the seventh year of our membership of the EU club and the currency helped us in no uncertain ways to face the global recession, but now the reckoning has started. We are in the same boat as the three ailing members and we have to contribute to their bailout in proportion to other members. Somebody asked me the other day if we are sure that the millions we have contributed will ever be repaid. Your guess is as good as mine – just look at a recent report by the OECD, which does not make happy reading. I would remind readers that the OECD is an association of 34 developed countries, including the US, Japan and European countries, that sponsors economic reform and trade exchanges. The OECD‘s prophecy is clearly written on the wall and its latest economic outlook points out that the global economic recovery still faces many risks, which could lead to ‘stagflation’. It forecasts a world growth of only 4.2 per cent this year, down from 4.9 per cent last year, but this will rise marginally to 4.6 per cent in 2012. Can anyone expect any better, with the relatively high oil price combined with Japan’s recent announcement of a recession?
All this turmoil reduces hopes of a swift recovery. And it is not raining, it is pouring, considering that a sharp slowdown in China could derail things for the recovery of the fragile euro. But there is a light at the end of the tunnel, as the OECD hopes that if and when commodity prices stabilise, recovery will pick up at the end of this year. This notwithstanding the devastating loss to Japan’s economy as a result of the earthquake, and the political instability of the Middle East. The OECD’s report refers to the possibility of strong pent-up demand for durable goods among Western consumers, and for capital equipment by businesses, as a reason why growth may take off more rapidly than forecast. All this is sweet music to the well-wishers of the euro club. Stability is badly needed and only confidence will put a smile back on the faces of the poor unemployed souls queuing in Dublin, Madrid, Athens and Lisbon job centres.
Back to Malta, Central Bank governor Michael C. Bonello has launched a Forum for Financial Stability, a grand event attended by John Fell, deputy director-general of the European Central Bank’s Financial Stability Division. In his address, the Mr Bonello warned that the fact that Malta’s financial system is not directly affected by the recent turmoil abroad should not give rise to complacency. Can we really confess that everything is gung ho for us as late joiners of the euro? It is true that the elusive elixir is to nonchalantly do nothing but just preserve confidence in our financial system. One may question if, in times of extreme euro volatility, the right solution is the organising of such a Forum for Financial Stability. Perhaps it will cocoon us from the woes of the euro and allow us to indulge in a structured dialogue on the identification and management of global risks that could have a negative impact on our property loans.
As far as the man in the street is concerned, there was no need to spread any alarm or discuss the cost of our contribution of future bailouts to the above-mentioned EU members, as long as our banking fraternity is alert to the recovery of non-performing loans. The governor rightly reiterated that there was a relatively high concentration of risk on both sides of bank balance sheets, in particular a significant exposure to the real estate sector, in the form of both loans and the collateral held against them.
To conclude, these are testing times for the euro and the 17 members of the club. While grey clouds gather on the horizon, and fear-mongers have a field day, one can only hope that sanity will prevail and the consequential apocalypse will be kept waiting.
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The writer is a partner in PKF,
an audit and business advisory firm.